CHAPTER 3—BALANCE SHEET
MULTIPLE CHOICE
1. The balance sheet reports:
a. the assets, liabilities, gains, and losses for a period of time
b. the changes in assets, liabilities, and equity for a period of time
c. the assets, expenses, and liabilities as of a certain date
d. the probable future benefits, probable future sacrifices, and residual interest for a period of
time
e. the financial condition of an accounting entity as of a particular date
2. Which of the following would not appear on a conventional balance sheet?
a. income taxes payable
b. funds from operations
c. cash surrender value of life insurance
d. appropriation for contingencies (restriction of retained earnings)
e. patents
3. At the beginning of the year, Execon Company had total assets of $200,000, total liabilities of $110,000,
and shareholders' equity of $90,000. For the year, Execon Company earned net income of $75,000 and
declared cash dividends of $30,000. At the end of the year, the company had total assets of $300,000 and
its shareholders' equity was at $135,000. At the end of the year, Execon Corporation had total liabilities
of:
a. $0
b. $45,000
c. $50,000
d. $165,000
e. none of the answers are correct
4. Ownership of debt instruments of the government and other companies that can be readily converted to
cash are best reported as:
a. long-term investments
b. cash
c. marketable securities
d. intangibles
e. inventory of near-cash items
5. Tangible assets on the balance sheet should include:
a. equipment
b. taxes payable
c. trademarks
d. bonds payable
e. none of the answers are correct
6. The current asset section of the balance sheet should include:
a. land
b. trademarks
c. investment in C Company (for purposes of control)
d. dividends payable
e. work in process inventory
7. The current liability section of the balance sheet should include:
a. buildings
b. goodwill
c. land held for speculation purposes
d. accounts payable
e. none of the answers are correct
8. Which of the following is not a current asset?
a. marketable securities
b. material inventory
c. unearned rent income
d. prepaid interest
e. prepaid insurance
9. If a parent has some control over a subsidiary but the subsidiary is not consolidated, the subsidiary is
accounted for as:
a. a marketable security
b. an investment
c. a liability
d. a fixed asset
e. none of the answers are correct
10. Which of the following is not a proper use of notes?
a. To describe the nature and effect of a change in accounting principle, such as from FIFO
to LIFO.
b. To indicate the basis for asset valuation.
c. To indicate the method of depreciation.
d. To correct an improper financial statement presentation.
e. To describe a firm's debt.
11. Company A owns shares of Company B and Company C. The statements of Company B are consolidated
with those of Company A. The statements of Company C are not consolidated. Company A reports
"Minority Interest" on its balance sheet. This account represents:
a. A's minority share of the stock of B
b. A's minority share of the stock of C
c. the minority share by outside owners of the stock of A
d. the minority share by outside owners of the stock of B
e. the minority share by outside owners of the stock of C
12. Drama Products Inc. has issued redeemable preferred stock. For analysis purposes, these securities are
best classified as:
a. marketable securities
b. long-term investments
c. long-term debt
d. paid-in capital
e. retained earnings
13. Treasury stock is best classified as:
a. a current asset
b. a long-term investment
c. a contra liability
d. a reduction of stockholders' equity
e. a reduction of retained earnings
14. Which of the following is not a common characteristic of preferred stock?
a. voting rights
b. preference as to dividends
c. preference in liquidation
d. callability by the corporation
e. none of the answers are correct
15. Which of the following is not a problem inherent in balance sheet presentation?
a. Most assets are valued at cost.
b. Varying methods are used for asset valuation.
c. Not all items of value to the firm are included as assets.
d. Liabilities related to contingencies may not appear on the balance sheet.
e. The owners' interest will be indicated.
16. Which of the following is not true relating to treasury stock?
a. A firm creates treasury stock when it repurchases its own stock and does not retire it.
b. Treasury stock lowers the stock outstanding.
c. Treasury stock may be recorded at the cost of the stock.
d. Treasury stock may be recorded at par or stated value.
e. Treasury stock is, in essence, an increase in paid-in capital.
17. Which of the following is not true about an ESOP?
a. An ESOP will reduce the amount of voting stock in the hands of employees.
b. An ESOP must be a permanent trusted plan for the exclusive benefit of the employees.
c. The plan participants become eligible for favorable taxation of distributions from the plan.
d. Commercial lending institutions, insurance companies, and mutual funds are permitted an
exclusion from income for 50% of the interest received on loans used to finance an
ESOP's acquisition of company stock.
e. An ESOP may reduce the potential of an unfriendly takeover.
18. The most popular depreciation method for financial reporting is the following:
a. units-of-production
b. sum-of-the-years’-digits
c. declining-balance
d. straight-line
e. other
19. Which of the following is a current liability?
a. prepaid insurance
b. account receivable
c. unearned rent revenue
d. building
e. common stock
20. Which of the following accounts would not be classified as an intangible?
a. franchises
b. research and development
c. patent
d. trademarks
e. goodwill
TRUE/FALSE
1. The purpose of a balance sheet is to show the financial condition of an accounting entity for a period of
time.
2. In a period of rising prices, LIFO usually results in a realistic cost of goods sold.
3. Generally accepted accounting principles and the Internal Revenue Code of tax law require that the same
depreciation method be used for both the financial statements and the federal tax return.
4. All intangibles are amortized over their useful lives or their legal lives, whichever is shorter.
5. Deferred taxes are caused by using different accounting methods for tax and financial reporting purposes.
6. Assets are probable future economic benefits obtained or controlled by an entity as a result of past
transactions or events.
7. Minority interest reflects the ownership of minority shareholders in the equity of consolidated subsidiaries
that are less than wholly owned.
8. The stockholders' equity section of the balance sheet includes redeemable preferred stock.
9. When a firm repurchases its own stock and retires it, the stock is called treasury stock.
10. A sole proprietorship form of business has only one owner.
11. The financial statements of legally separate entities may be issued to show the financial position and
income as they would appear if the companies were one legal entity. Such statements reflect a legal,
rather than an economic, concept of the entity.
12. Current assets are listed on the balance sheet in order of liquidity.
13. Long-term investments, usually stocks and bonds of other companies, are often held to maintain a
business relationship or exercise control.
14. When preferred stock has a preference as to dividends, the current year's preferred dividend must be paid
before a dividend can be paid to common stockholders.
15. If dividends are not declared by the board of directors in a particular year, a holder of cumulative
preferred stock will never be paid that dividend.
16. Preferred stock usually has voting rights.
17. Warranty obligations are estimated in order to recognize the obligation at the balance sheet date and to
charge the expense to the period of the sale.
18. Corporations do not use a standard title for owners' equity.
19. A quasi-reorganization is an accounting procedure equivalent to an accounting fresh start.
20. The principal financial statements are the balance sheet, income statement, and statement of cash flows.
21. The deferred compensation element of an equity-based deferred compensation arrangement is the amount
of compensation cost deferred and amortized (expensed) to future periods as the services are provided.
22. An ESOP is a qualified stock-bonus or combination stock-bonus and money-purchase pension plan
designed to invest primarily in stock, other than the employer's securities.
23. The Internal Revenue Code penalizes borrowing for an ESOP.
24. The balance sheet is presented with the assets equal to liabilities plus equity. When this presentation is
presented side by side, it is called the account form.
25. The analyst must assume that securities classified as marketable securities are readily marketable.
26. There are many alternative titles for the statement of stockholders’ equity. The most frequently used
alternative title is the statement of shareholders’ equity.
27. When the bond market interest rate is 6% and the bond contractual interest rate is 8%, the bond will sell at
a premium.
28. Noncontrolling interest reflects the ownership of noncontrolling shareholders in the equity of consolidated
subsidiaries less than wholly occurred.
29. Noncontrolling interest should be presented at the bottom of stockholders equity.
30. IFRS require a standard format for the balance sheet.
31. Using IFRS, usually noncurrent assets are presented first, followed by current assets.
32. Under IFRS, reserves may result from upward revaluations of properties and investments.
PROBLEMS
1. Assume that Eugene Motor Corp. uses the following headings on its balance sheet:
A.
B.
C.
D.
E.
F.
G.
H.
I.
Current Assets
Investments
Property, Plant, and Equipment
Intangible Assets
Current Liabilities
Long-Term Liabilities
Capital Stock
Retained Earnings
Stockholders' Equity
Required:
Indicate by letter how each of the following should be best classified. If an item would not appear on the
balance sheet but would appear in a note to the financial statements, use the letter "N" to indicate this. If
an item is neither reported on the balance sheet nor disclosed as a note, use the letter "X" to indicate this.
If the account balance is normally opposite that of a typical account in that classification, indicate this by
placing the letter in parentheses.
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.
u.
v.
w.
x.
Patents
Merchandise Inventory
Taxes Payable
Employee Payroll Deduction for State Income Taxes
Cash
Office Supplies
Preferred Stock
Common Stock
Work in Process
Land
Accounts Receivable
Accumulated Depreciation
Unearned Rent Income
Unamortized Bond Payable Discount (bond payable five years
from current balance sheet date)
Receivable from Officer—due in 6 months
Accumulated Deficit (losses incurred since inception)
Insurance Expense
Goodwill
Interest Accrued on U.S. Government Securities Owned
Accounts payable
Treasury Stock
Wages Payable
Land Purchased as Future Development Site
Unexpired Rent Expense (prepaid rent)
2. Required:
Using the letters provided, classify items (1–13) according to the most commonly preferred balance sheet
presentation.
Assets
a. Current Assets
b. Tangible Assets
c. Investments
d. Intangibles
e. Other
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
Liabilities and Stockholders' Equity
f. Current Liability
g. Long-Term Liability
h. Capital Stock
i. Retained Earnings
j. Items Not Included on Balance Sheet
Land
Marketable Securities
Goodwill
Inventories
Premium on Preferred Stock
Appropriation for Expansion
Depreciation Expense
Investment in K Company Bonds (long-term investment)
Accounts Payable
Bonds Payable
Equipment
Copyright
Unamortized Premium on Bonds Payable
4. The following is a partial listing of accounts for Euisara, Inc., for the year ended December 31, 2010.
Required:
Prepare a balance sheet in good format for December 31, 2010.
Finished Goods
Current Maturities of Long-Term Debt
Accumulated Depreciation
Accounts Receivable
Sales Revenue
Treasury Stock
Prepaid Expenses
Deferred Taxes (long-term liability)
Interest Expense
Allowance for Doubtful Accounts
Retained Earnings
Raw Materials
Accounts Payable
Cash and Cash Equivalents
Sales Salaries Expense
Cost of Goods Sold
Investment in Unconsolidated Subsidiaries
Income Taxes Payable
Work In Process
Additional Paid-In Capital
Equipment
Long-Term Debt
Rent Income
Common Stock
Notes Payable (short-term)
Income Tax Expense
$
9,718
1,257
9,980
24,190
127,260
251
2,199
8,506
2,410
915
18,951
9,576
19,021
8,527
872
82,471
3,559
8,356
1,984
9,614
41,905
15,258
2,468
3,895
6,156
2,461
8. Required:
Match each account to the proper account description by placing the appropriate letter before the account
name; not all letters will be used.
Account
____ 1. Accounts Payable
____ 2. Accounts Receivable
____ 3. Accrued Liabilities
____ 4. Accumulated Depreciation
____ 5. Cash
____ 6. Common Stock
____ 7. Convertible Debentures
____ 8. Deferred Income Taxes (liability)
____ 9. Equipment
____ 10. Inventory
____ 11. Land
____ 12. Marketable Securities
____ 13. Minority Interest
____ 14. Paid-In Capital in Excess of Par
____ 15. Retained Earnings
____ 16. Treasury Stock
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.
Account Descriptions
Stocks and bonds of other companies held for the purpose of exercising control.
An accumulation of the sum of the expense since the beginning of the benefit period.
Outside ownership in the equity of consolidated subsidiaries.
Machinery and tools, valued at historical cost.
Monies due because expenses, such as salaries, are incurred in a different period than when
the cash outlay occurs.
The most liquid of assets, it may also include savings accounts.
Goods on hand.
A potential liability created by differing tax and reporting methods.
Ownership and debt instruments readily converted to cash.
An expenditure made in advance of the use of the service or good.
Monies due from customers arising from sale or service rendered.
The capital stock of residual owners.
Bonds that can be exchanged for stock at the option of the holder.
Undistributed earnings of the corporation.
Shares of the firm's own stock that have been repurchased.
Monies due for goods bought for use or resale.
Excess over legal par paid at time of sale.
Nondepreciable real estate.
Collections in advance of service.
Securities that give the holder the right to buy additional shares of common stock at a fixed
price.
9. An item of equipment acquired on January 1, at a cost of $100,000, has an estimated use of 50,000 hours.
During the first three years, the equipment was used 11,000, 8,000, and 7,000 hours, respectively. The
equipment has an estimated life of five years and an estimated salvage of $10,000.
Required:
Determine the depreciation for each of the three years, using the straight-line method, the double
declining-balance method, the sum-of-the-years'-digits method, and the units-of-production method.
10. Smith Company has had 10,000 shares of 8%, $100 par-value preferred stock, and 15,000 shares of $10
par-value common stock outstanding for the last two years. During the most recent year, dividends paid
totaled $100,000; in the prior year, dividends paid totaled $60,000.
Required: Compute the amount of dividends that must have been paid to preferred stockholders and
common stockholders in each of the years, given the following independent assumptions:
a. Preferred stock is nonparticipating and noncumulative.
b. Preferred stock is nonparticipating and cumulative.